Warning: shock ahead

By Gérard Bérubé

Much has been written about the drain on public resources by an aging population. However, discussions about the wealth effect of this demographic trend on tax revenues are just beginning. An even more obscure aspect of the debate is the issue of corporate succession and the enormous transfer of assets of small and medium-sized enterprises that lies ahead. The statistics are alarming because they indicate that 75% of enterprises do not survive their founders. From this perspective, are we prepared for the shock to come?

The numbers are impressive. According to a survey of Canadian businesses conducted by the CIBC, $1.2 trillion in assets is poised to change hands by 2010 — the largest turnover of economic control ever seen in Canada. In the next five years, 500,000 Canadian entrepreneurs plan to retire. By 2010, there should be 915,000 millionaires in Canada (compared with 295,000 in 2000) as 80% of owners cash in on the sale of their business.
And this is only the tip of the iceberg. Intergenerational transfers should peak between 2011 and 2016, when more than half the entrepreneurs have retired and the assets transferred or involved have reached $3.7 trillion in Canada.

There is still more alarming news. About one-third (31%) of respondents expect the bulk of their retirement income to come from the sale of their business. On this point, 15% of entrepreneurs said they were planning to transfer their business to a family member, while 40% intended to sell to outside interests. As for what happens next, only two in five owners have a clear plan for exiting their small businesses. A large percentage (60%) of entrepreneurs aged 55 to 64 had no exit plan whatsoever and had not even begun to discuss an exit strategy with their family or business partners.

Given that 70% of businesses in Canada are family owned, that they represent more than 50% of GDP and half of all salaries paid, and that they create two-thirds of new jobs, there is cause for concern. And since only 25% of such businesses transfer to the second generation, and barely 10% to the third generation, the shock is likely to be brutal.

Of course there are success stories such as the Quebecors, Power Corps, Bombardiers and Jean Coutus of the world. And then there’s Molson, which has remained a family concern for more than 200 years. But a different scenario is unfolding — one in which business failures are in the spotlight. This brings to mind such names as Vidéotron and Steinberg, two firms that failed the second-generation test, and Seagram, which did not make it past the third.

It is important to remember that passing the torch is a highly complex operation. Philippe de Gaspé Beaubien, the former owner of Télémédia and co-chair of the Business Families Foundation (which provides family businesses with educational opportunities, support and training programs addressing succession and governance issues) has made it his “retirement project.” In his view, there are three dimensions to succession. First there is manage-ment of the enterprise, then ownership or share distribution among family members, and finally control.

In fact, de Gaspé Beaubien was the only one to sound the alarm about succession issues 14 years ago. Today, some 30 organizations and university centres are working on documenting insights into this issue and major venture capital investors have launched financial programs geared to the business succession issue.

There are three dimensions to succession: the family, share control and business management. De Gaspé Beaubien also mentions three ingredients for a successful succession process: a good board of directors with independent members, a career plan for the predecessor who will have to occupy his or her free time and mentors for the next generation.

And de Gaspé Beaubien really understands the issue. In the late 1990s, he was forced to sell Télémédia as none of his three children wanted to take the reins. After more than 30 years in the exclusive circle of Quebec media barons, he said he spent 10 years preparing the process and five years trying to put it into action. But he was just perpetuating the family destiny: after 350 years in business, not one Beaubien has managed to transfer a business to the next generation.

In the next five to 10 years, this will become the fate of numerous entrepreneurs because, according to the CIBC survey, only a minority can count on RRSPs or pensions to meet their retirement needs. (For the full survey, visit www.CAmagazine.com/entrepreneurs.)

Gérard Bérubé is editor of the Économie et finance section of Le Devoir in Montreal